Shorting EWI: Italy Trade Update

Positions in Europe: Short Italy (EWI)


Keith shorted EWI in the Hedgeye Virtual Portfolio today with the etf overbought on its immediate term TRADE duration. Our thesis on Italy remains intact: the country’s public debt overhang will continue to compromise growth and compress tax receipts as PM Monti continues to press the austerity button that should crimp confidence and spending and heighten unemployment.  And recent fundamentals are reflecting this weakness: Retail Sales were down -3.7% in DEC Y/Y vs -1.8% in NOV; Business Confidence fell to 91.5 in FEB vs 92.1 in JAN; the Unemployment Rate rose to 9.2% in JAN vs 8.9% DEC; and CPI remains elevated at 3.4% in JAN Y/Y vs 2.6% for the Eurozone aggregate.


We’re forecasting a long TAIL to Europe’s sovereign debt ‘crisis’, especially under a scenario in which the current Eurozone fabric is maintained (that is to say Greece and Portugal don’t “default” and stay in the Union), which we think is probable given Eurocrat resolve. As the goalposts continue to change (think ISDA ruling on Greek debt) and uncertainty abounds (think structure around the ESM and EFSF or terms and outcome of a “fiscal compact”) we expect volatility ahead across European markets and we’ll tactically take advantage of these price swings.


Matthew Hedrick

Senior Analyst


Shorting EWI: Italy Trade Update - 1. MIB

Retail: Spotlight on the Mid-Tier

February comps came in largely ahead of expectations shining the spotlight on mid-tier weakness ever brighter.


February sales reflect a solid start to the year for retailers…most of retail that is. The beat-to-miss ratio was favorably skewed with 14 companies coming in ahead of expectations compared to only 4 misses. The most notable callout from the morning is the fact that on the same month that JCP and DDS join the ranks of the SSS alumni, KSS was one of the few retailers to come in below expectations shining the spotlight on mid-tier weakness ever brighter. This is consistent with our view that the increasingly competitive pricing dynamic playing out in the mid-tier is heating up.


Here are some additional callouts:


  • The High/Low-end department store performance spread remains intact. JWN comps came in 4+ pts above consensus at +10.2%, SKS +6.6% & M +4.6% while KSS came in (-0.8%) as one of the key misses on the morning. JWN highlighted a shoe clearance event that typically takes place in March as a driver of 200-250 bps of comp during the month with a negative 150-200bps impact on March however excluding the event’s contribution, comps would have still come in ahead of estimates by 2 pts.  
  • Off-price retailers ROST and TJX continue to outperform with both reporting +9% in February ahead of expectations. Notably the spread between the blended off-price comp and total monthly comp increased from +3.9% to +4.1% in February. Both retailers highlighted favorable weather as drivers of spring apparel sales during the month. Exiting 2012, guidance from both TJX and ROST suggested upside to consensus 2012 EPS expectations. As pricing continues to heat up at the mid tier (see KSS), we expect the off-price channel to continue to outperform.  
  • KSS: was the clear underperformer (-0.8%) vs. (-0.1%E) and is now the last mid-tier retailer standing with both JCP and DDS no longer reporting monthly comps. KSS highlighted children’s, women’s, footwear and home as slightly positive to negative; all categories that were positive callouts among other companies reporting this morning.
  • GPS: was one of the biggest upside surprises of the day +4% vs. (-1.6%E) with positive comp growth across all of the domestic businesses. The first round of merchandise designed at the new Global Creative Center in NYC hit stores on February 10th. CEO Glenn Murphy did not comment specifically on the Feb MTD performance of the new spring product on last week’s call but not surprisingly was optimistic regarding the creativity at the new global hub.
  • TGT: beat expectations in both January & February by 2 pts up +7% this month. February performance was notable given an increase in comp transactions, average transaction size, better than expected traffic and comp increases in every region. Further, TGT comped positively across all of its major categories for the first time in over a year (see table below).
  • LTD: came in +8% vs. +7%E after increasing guidance for the month from LSD to MSD. Consistent with guidance given on the Q4 call, the company again highlighted merchandise margins down in all segments.
  • ROST, TJX, TGT were all positive regarding their inventory position at month end while WTSLA highlighted low inventory levels resulting in weaker top line results.
  • At a category level, Handbags, Footwear and Accessories continue to perform well at the high-end (JWN, SKS) with men’s and women’s apparel highlighted by TGT, M, BKE, SKS, ROST.


Longs: LIZ, NKE, RL



Matthew Darula



Retail: Spotlight on the Mid-Tier - high low comp


Retail: Spotlight on the Mid-Tier - Total SSS


Retail: Spotlight on the Mid-Tier - TGT SSS grid


Initial Claims Flat for the Third Week

The headline initial claims number came in flat, falling 2k after the upward revision to the prior week's data. Rolling claims fell 5.5k to 354k. On a non-seasonally adjusted basis, claims fell 15k to 332k.


In our note last week, we walked through a quantification of the distortion in seasonal adjustment factors arising from the Lehman shock in 2008.  Because the Labor Department uses a five-year lookback to create its seaosnal adjustment, the 2008 shock is still percolating through the data.  


The seasonal distortion plays out as follows.  Claims are understated in the last weeks of February by the largest amount.  From now through May, the understatement disappears.  Absent an underlying trend in the series, this effect would drive claims higher by about 20k over the course of the next three months.  By July, the distortion reappears, this time as an overstatement, pushing claims slightly higher still. From July through year-end, the distortion disappears, and the underlying trend will be reflected in the weekly data. 












2-10 Spread

The 2-10 spread tightened 3 bps versus last week to 167 bps as of yesterday.  The ten-year bond yield decreased 3 bps to 197 bps.






Financial Subsector Performance

The table below shows the stock performance of each Financial subsector over four durations. 




Joshua Steiner, CFA


Allison Kaptur


Robert Belsky


Early Look

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LIZ: Noise = Buying Opportunity

There was a lot of noise embedded in LIZ’s Q4 results as expected, but the take away from the quarter is unequivocally net positive. We see weakness in the stock following these Q4 results as a buying opportunity for those who remained on the sidelines looking to get into the stock below $10. Here’s your chance.


Here are our thoughts on the quarter and LIZ story:

  • For starters, headline Q4 revenues came in down -3%, but on an adjusted bases accounting for businesses sold or exited, revenues came in up +12%. Kate and Lucky came in in-line to above our expectations while the Partnered Brand business (now Adelington Design) and Juicy accounted for the $25mm difference equally.
  • As expected, the additional brand disclosure provided improved clarity revealing among other things how profitable and meaningful Kate Spade is to the LIZ story. We expect the profitability of Kate to continue to ramp up to 16-17% operating margins over the next two years. Also revealed was that Lucky did indeed breakeven for the year. We expect margins to expand meaningfully to MSD this year as top-line strength continues.
  • Additionally, we see the comp outlook by each brand to be conservative. The outlook for Juicy is in-line with our own. As we noted in Monday’s “LIZ Q4 Preview” note, we expect this turn at Juicy to be a gradual one, which is reflected in MSD comp growth for 2012. Lucky, on the other hand is starting off the year better than we expected as the women’s business continues to drive growth. We are taking our numbers up to a +11% comp from our prior +8% estimate.
  • As for Kate, we think management is flat out sandbagging expectations – that’s fine actually. It does no good to set unrealistic expectations for the brand. Compared to management’s outlook for mid-teen comps and 30%+ revenues, we are modeling +20% comps and 40% revenue growth, which could in fact prove conservative.
  • One of the few callouts from the call that differed from our expectations was the announcement that 35-40 stores will be added at Kate and Jack Spade alone ahead of the 20 stores we were modeling. This will adding an incremental $25mm to F13 revenues driving sustainable 35%-40% revenue growth over the next 3-years.


With gross margins expanding largely from brand mix and SG&A cost reductions coming in as planned we are shaking out $0.26 in EPS for F12 and $0.65 in F13 reflecting $145mm and $205mm in F12 and F13 EBITDA respectively. As we move through 2012, we think investors will start looking out to $1 in earnings power in three years (F14). That is NOT reflected in the stock at $10. Below is our updated sum-of-the-parts by brand. LIZ remains our top long and we think it doubles again this year.


LIZ: Noise = Buying Opportunity - LIZ SOP

Trailer Homes

This note was originally published at 8am on February 16, 2012. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“We don’t want a society where when you lose your job you live in a trailer home, like in the U.S.”

-Nicholas Sarkozy


Over the course of my 13 years in this business, I’ve seen bubbles in Tech, Housing, and Keynesian Economics. Now the bubble in dumb politicians has gone global.


I know some people don’t like being called names. That’s why I call those ones in particular names. Sometimes, if you want to creatively destruct dogmas, you just have to pick a fight. That’s pretty easy to do with the left leaning leader of France.


Ironically enough, American politicians are now competing with the Japanese and Europeans on who can lean the most left in market interventions. When I left Canada in 1994, I never would have thunk I would see the day. It’s sad to watch.


Back to the Global Macro Grind


I didn’t short the SP500 yesterday at 11:58AM (1355) because I wanted to pick a fight – it’s because my process had it immediate-term TRADE overbought. The process obviously isn’t perfect, but it is repeatable – and when I get something right, I know why.


Yesterday I wrote about being wrong and how I deal with my own issues. If you couldn’t tell, I have a lot of issues. My goal in life is to improve upon them. In addition to President Sarkozy, politicians who understand Keynesian Policies To Inflate are having some issues of their own this morning:

  1. JAPAN – the Yen continues to go down in a straight line this week, down another -0.54% this morning to $78.80 vs USD
  2. SPAIN – the Spaniards are having a tough time selling pig paper at lower yields (2.3B EUR in 2015 bonds priced at higher yields)
  3. VENEZUELA –the Latin American FX debaucherer, Hugo Chavez, has fallen behind his Presidential challenger, big time



Yeah, I know you probably wanted someone to write to you about Greece or whatever a 12-month late Ratings Agency is thinking about what they should have warned you about 12 months ago…


Instead, consider the following about the Hugo Trailer Homes model (see chart):

  1. Collapse the currency
  2. Inflate the stock market
  3. Lose the Election

Last year, when almost 90% of country stock markets closed down for the YTD (sorry to remind everyone), Venezuela was up +79.1%. That was the best performing stock market in the world by a Madoff mile.


Instead of made for TV “rallies” on no volume (or inflows from The People), what does a Policy To Inflate get you in Venezuela, Wisconsin, or Milan?


Angry (and hungry) people.


We’ve never seen a $100 handle on the price of oil (pick your vintage – Brent, WTI, etc.) not Slow Global Growth. Now maybe the Sell-Side Strategists who told you to buy everything Global Equities on green last February are telling you it’s “Different This Time”, but I’m on the other side of that trade.


I can see exactly where perma-bulls are coming from – their risk management models have not changed. And that’s actually sad too. One of the many globally interconnected reasons I shorted SPY at 1355 instead of chasing it yesterday was that US Industrial Production Growth for January was reported at 0.00%.


Nice round number – and while The Bernank might like the ring of the zero percent thing, stock and commodity markets did not:

  1. US Industrials (XLI) were the worst performing S&P Sector of the day at -1.3%
  2. Dr Copper snapped its immediate-term TRADE line of $3.88/lb and is down another -1.1% this morning
  3. SP500 closed down for the 3rdday in the last 4

These are simply the facts. And I get paid to report them to you in the order that they are received.


Last week, I wrote a note telling you what I thought you should focus on instead of Greece:

  1. Japan’s Sovereign Debt Maturity Spike in March
  2. China’s Growth Slowing Sequentially (China’s Foreign Direct Investment reported overnight was down y/y!)
  3. The almost hyper global inflation/deflation relationship driven by policies driving the US Dollar

The bad news is that most of this is becoming new news to consensus. The Good news is where this all started is beginning to end – the US Dollar stabilizing in the last 48 hours is the most bullish fundamental factor I have in my notebook this morning.


While that may not be good for the guy who bought the Basic Materials ETF (XLB) or Freeport McMoran (FCX) at last week’s top, Deflating The Inflation is great for all my friends who grew up in Trailer Homes.


My immediate-term support and resistance ranges for Gold, Oil (Brent), EUR/USD, US Dollar Index, Spain’s IBEX, Shanghai Composite, and the SP500 are now $1714-1754, $116.79-119.79, $1.30-1.31, $79.01-79.73, 8444-8653, 2340-2389, and 1339-1354, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Trailer Homes - Chart of the Day


Trailer Homes - Virtual Portfolio

CHART OF THE DAY: Don't Hate The Debate


CHART OF THE DAY: Don't Hate The Debate - Chart of the Day

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